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About Due Diligence

The standard North Carolina residential Offer to Purchase and Contract gives a buyer a due diligence time period to investigate the property in return for a non refundable due diligence fee paid upfront directly to the seller. The buyer has the right to terminate the sales contract for any reason during the due diligence time period and forfeit only the amount of the due diligence fee already paid. The due diligence fee and period effectively function as an option to buy either upon the original terms of the contract or upon modified terms agreed to during the due diligence period. The buyer will typically have significantly more money at risk in the form of earnest money if they do not complete the purchase after the due diligence period expires.

During the due diligence period, buyers will usually perform inspections of the property, have appraisals and loan approval completed and investigate any other aspects of the property or sale that might impact their final decision to complete the purchase. Buyers may choose to further negotiate terms of the contract with the seller based on the results of their due diligence. Negotiations often involve sellers completing repairs, paying for some of the buyers expenses in lieu of repairs or reducing the purchase price if the appraisal comes in below the purchase price. Sellers are not required to make any concessions to the buyer’s requests, with the buyer’s recourse being to terminate the contract and walk away from the due diligence fee already paid to the seller if they can’t reach a satisfactory agreement.

How long a due diligence period and how much due diligence money are negotiable items and what is reasonable to both buyer and seller will vary depending on the property involved and other circumstances. A higher fee and shorter period will be favored by sellers and the reverse by buyers. In addition to the due diligence fee paid directly to the seller, buyers will typically come out of pocket for inspection fees, appraisal fees, credit reports etc., – money that will also be lost if the buyer elects to walk away from the transaction. Since buyers would like to have their loan fully approved prior to their due diligence period expiring, it is very much in the buyers best interest to have as much of the approval process completed before entering into a contract – to have the the only obstacle to full approval being the lender approving the property through an appraisal rather than needing to approve the borrowers.

While the due diligence process is on going, both buyers and sellers need to understand that their transaction does not exist in a vacuum. New properties are coming on the market daily that may have more appeal to the buyer than the one they currently have under contract. Sellers will typically still show and encourage back up offers on their property in case the original buyer decides not to complete the purchase. These things can all come into play in negotiations during the due diligence period.

Navigating due diligence with a contract intact usually leads to a successful closing of the property. Once due diligence expires, buyers stand to forfeit whatever earnest money they may have agreed to in the original contract, and this is usually enough that the buyer does not want to walk away from it, and if they do, enough that the seller is compensated for the buyer not closing the sale. Sellers will generally not want to incur the expense and inconvenience of moving out of an occupied house until the due diligence period has expired, so there is often a period of time between due diligence expiring and closing on an occupied property sufficient for the seller to move and to complete any items agreed upon in due diligence negotiations.